India Markets Weekahead: Sandwiched between Kim and Trump

REUTERS - Geopolitical worries were back in focus on Friday with markets witnessing the sharpest single-day fall of 2017.

People watch a large screen displaying India's benchmark share index on the facade of the Bombay Stock Exchange (BSE) building in Mumbai, India, January 20, 2016. REUTERS/Shailesh Andrade/Files

Investors were also wary of widening fiscal deficit after the Indian finance minister announced the government may come up with measures to revive economic growth. It seems the government is finally taking note of the slowdown instead of talking up the economy.

The Nifty fell below the 10,000 mark to end lower by 1.2 percent and settle at 9,964. Mid- and small-cap indexes also saw heavy selling pressure with the respective indexes down by more than 2 percent. However, the pharma sector hogged the limelight with buying seen in some beaten-down stocks.

The rupee fell to a nearly six-month low of 65.14 against the dollar, the lowest since April this year. The U.S. Federal Reserve’s plan to unwind its balance sheet and a possible rate hike by the end of the year impacted market sentiment. The rupee closed at 64.85 against the dollar.

Heat on the geopolitical front continued as both Kim Jong Un and U.S. President Donald Trump were engaged in an increasingly hostile war of words over North Korea’s weapons programme.

Tremors were felt in North Korea on Saturday but international observers were not sure whether this was another nuclear test. However, U.S. bombers staged a show of force by flying close to North Korea’s east coast.

The interest rate decision by the Federal Open Market Committee (FOMC) was in line with expectations as the Federal Reserve kept the target range for the Fed Funds rate unchanged at 1.00-1.25 percent.

The dot plot, which the Federal Reserve uses to signal its outlook for interest rates, shows policymakers expect one more rate increase this year and three in 2018, based on median estimates. It also provided a clear plan for a systematic reduction in its bond purchases.

Back home, Finance Minister Arun Jaitley announced that the government is working on additional measures to bolster economic growth, which slumped to a three-year low in the June quarter.

Talk of a 400-500 billion rupee stimulus is doing the rounds. Probable measures that could be announced include sops to address exporters’ concerns, credit subvention for SMEs, more funds for railways, more capital for banks, measures to revive private investments, and funds for rural infrastructure and housing.

On the banking front, media reports said that Vijaya Bank and Dena Bank have expressed interest in a merger and are reportedly in the initial stages of discussing synergies. This is probably an early sign of the government’s ambitious plan for PSU bank consolidation taking shape.

The government is pushing for consolidation among PSU banks for better efficiency and scale, and help them operate without the support of repeated capital infusion to bolster their balance sheets.

The push for affordable housing continues with the government extending the interest subsidy of about 260,000 rupees on home loans under the Pradhan Mantri Awas Yojana (Urban) till March 2019.

It also unveiled a policy to encourage private-public partnership in affordable housing, encouraging developers taking up projects under the government’s ‘Housing For All By 2022’ scheme.

Telecom stocks were in focus after the Telecom Regulatory Authority of India’s (TRAI) move to cut interconnect usage charges by 57 percent. This move is likely to be detrimental to incumbent operators such as Bharti Airtel and Idea Cellular, but beneficial to newcomer Reliance Jio.

The government has clarified that the Goods and Services Tax (GST) refund for July 2017 is not 650 billion rupees as reported in the media, but could be limited to just about 120 billion rupees. This raises another fear among assessees that much of the remaining amount could go into litigation, thus squeezing liquidity for the business for a while longer.

The coming week is expected to be a volatile one with derivative contract expiry on Thursday. The Germans are heading to the polls for a federal election that will decide whether Chancellor Angela Merkel has another four years in power. Global market cues will be watched before trading opens on Monday.

We have now seen the first signs of correction. Whether it continues in the coming week will be decided by action on the North Korea front. With the domestic economy in a tailspin, we also need to see what the government does to correct its course. More importantly, the impact on the fiscal deficit due to such measures needs to be taken into account.

A further fall is bound to unnerve new investors and we could see the fall gathering momentum. Though fresh liquidity flows continue, the pace could slow on geopolitical and economic concerns.

Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.